Wednesday 3 March 2010 12.54 EST
First published on Wednesday 3 March 2010 12.54 EST

The Obama administration's radical plan to limit the size of banks and ban risky trading activities is "too difficult" to achieve, according to the business secretary, Lord Mandelson, who delivered the bluntest signal yet of British unhappiness with the direction of US financial reforms.

On a visit to Manhattan, Mandelson criticised the US government for proposing unilateral banking reforms without reference to other G20 nations. And he made it clear that Britain's preferred route is more effective regulation of institutions in their present form, rather than attempting to cut banks down to size.

In a speech to business students at New York University, Mandelson expressed discontent with the White House's sudden proposal of wholesale reforms last month: "President Obama's proposals on banking regulation, I have to say, came as a bit of a surprise to people working on the G20 agenda and it's important that we keep the multinational agenda firmly on track."

Speaking to journalists later, Mandelson attacked the so-called Volcker rule, which would prohibit banks from operating hedge funds, private equity funds and from proprietary trading: "Trying to apply sweeping rules about the structure, content and range of activities of banking entities is too difficult to do."

He made it clear he would not countenance a curtailment of the scope of investment banks: "Whatever their size, whatever their range of activities, you need good regulation. It's the principle and practice of regulation you have to focus on, not the size of banks."

The business secretary's remarks come hot on the heels of caution expressed on Tuesday by the Financial Services Authority chairman, Lord Turner, who told a House of Commons select committee that Britain was unlikely to ban "prop trading", through which banks trade with their own money rather than clients' funds, and would instead look at capital requirements to ensure solvency.

Wall Street banks are vigorously lobbying against restrictions on their activities, and the Volcker rule – named after former Federal Reserve chief Paul Volcker – looks set to be watered down by sceptical lawmakers in the US senate. The plan is the centrepiece of Obama's strategy to combat so-called "casino" activity on Wall Street, blamed for the credit crunch. The administration also intends to impose a levy on banks and to create a new consumer protection agency.

While in New York, the business secretary took the opportunity for a sly dig at currency speculators who have driven the pound below $1.50 this week on concern at the possibility of post-election political uncertainty.

Mandelson said he believed investors were less concerned about a hung parliament than a Conservative victory: "I don't know if it's the case that the markets are reacting to the prospect of a new, perhaps lightweight, less experienced government after the election, should the Conservatives win."